BILL ANALYSIS                                                                                                                                                                                                    






SENATE FINANCE, INVESTMENT AND INTERNATIONAL TRADE
Senator Tim Leslie, Chairman       Bill No:  SB 579 
                                   Author:Dunn
                                   Amended:  May 3, 1999

Hearing:  May 12, 1999             Fiscal:   No

SUBJECT:  Finance lenders

DIGEST -- WHAT THE BILL DOES

      EXISTING LAW  directs the Department of Corporations to  
administer and enforce the California Finance Lenders Law  
which provides for the licensing and regulation of those  
engaged in the business of making consumer or commercial  
loans.
     
      THIS BILL  clarifies the term "bona fide principal  
amount" of a loan and specifically excludes certain charges  
from the definition.
  
  FISCAL EFFECT: None.

COMMENTS:

A. What constitutes "charges":

     Financial Code Section 22200 specifies that "charges"  
include "the aggregrate interest, fees, bonuses,  
commissions, brokerage, discounts, expenses, and other  
forms of costs charges, contracted for, or received by a  
licensee or any other person in connection with the  
investigating, arranging, negotiating, procuring,  
guaranteeing, making, servicing, collecting, and enforcing  
of a loan or forebearance of money, credit, goods, or  
things in action, or any other service rendered." 

B.  Purpose of the bill:

     According to the Department of Corporations, the  
sponsor of the bill, "SB 579 seeks to clarify and make  
specific the term 'bona fide principal amount' of a loan to  
provide a uniform approach for determining whether small  
loans must comply with existing public protections."
     
C. Existing borrower protections for consumer loans:










     The California Finance Lenders Law (CFLL) sets forth  
regulations to protect borrowers of small loans from unfair  
lending practices of licensed lenders and brokers.  These  
protections vary depending on the amount of the loan.   
     
     For  consumer loans under $2,500  lenders must adhere to  
regulations that limit the maximum amount of loan charges.  
(Financial Code Sections 22303, 22304 and 22305) NOTE:  the  
maximum rate of charges range from 12-30% per year  
depending on the unpaid balance.  The limit on the amount  
of administrative fees is $50.
 
     Lenders that make  consumer loans under $5,000  are  
subject to regulations prohibiting compounded charges  
(Section 22309), limiting the amount of delinquency fees  
(Section 22320.5), requiring a schedule of charges (Section  
22325), prohibiting loan splitting (Section 22327),  
prohibiting real property collateral (Section 22330), and  
limiting the maximum loan term (Section 22334).

     For  consumer loans below $10,000  lenders must meet  
regulations that limit other business activity (Section  
22154), require equal periodic installments (Section  
22307), and require standards for the sale of insurance  
(Sections 22313, 22314).

C. Problem with current law:

     Current law does not define "bona fide principal  
amount."  The Department of Corporations reports that this  
uncertainty in the law has created administrative and  
enforcement problems for it and its licensees.  Some  
unscrupulous lenders have taken advantage of this loophole  
in the law by adding multiple charges and other fees to  
increase the size of a loan and thereby avoid the small  
loan regulations.  Without a definition of "bona fide  
principal amount" of a loan, these lenders argue that  
charges and other fees are part of the loan principal.  
     
     The Department cites two examples resulting from this  
deficiency in the law.  In the first case, a lender was  
soliciting beneficiaries of wills and making them so-called  
"probate loans" which it secured with proceeds from the  
estate.  One borrower paid almost $2,000 in charges and  
other fees to obtain a loan of $3,600.  By financing these  









charges, the loan amount was increased and the borrower did  
not receive the proper small loan protections.  As a  
result, he was required to pay nearly $12,000 over 10 years  
at an annual percentage rate of 25%.  The borrower was also  
required to provide the home as collateral for the loan,  
and to appoint the lender as the power of attorney.

     The second case cited by the Department involved a  
lender making used car loans in which it would add such  
charges as administrative fees and costs of insurance to  
the principal amount of the loans.  By doing so, the lender  
increased the amount of these small loans ($1,700) into  
larger loans ($2,500) thereby avoiding the statutory  
limitation on rates and charges.  As a result, the annual  
percentage rate for many loans exceeded 140%.   

D.  Arguments in support:

      The Department of Corporations and the Consumers  
Union argue that this bill would benefit the public by  
providing borrowers of small loans with additional  
protection from unfair lending practices.  

     The Department further states that lenders would  
benefit from this bill as it clarifies their responsibility  
under existing law, which will help them, avoid legal  
actions.  Finally, the Department claims that this bill  
would help it administer its existing lending program by  
eliminating uncertainty in the law.

E.  Arguments in opposition: None received by the  
committee.
     
SUPPORT AND OPPOSITION:

A.Support:
     
     Department of Corporations (sponsor)
     Consumers Union

B.  Opposition:  None reported to the committee.


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Consultant:  Trudi Sprague  (916) 445-6306